Hyundai Motor sold one of its factories in Beijing last year, at a time moves have accelerated to relocate production bases from China. Korea Times file

Greater production costs, US-China rivalry and China's zero-COVID approach weighing on Korean businesses

By Kim Bo-eun

HONG KONG ― With its cheap and abundant manpower, China has long relished its role as the so-called world's factory, offering lower production costs to lure global brands and retain domestic manufacturers for decades.

But a gradual rise in expenses, such as labor costs, has been weakening China's role as a go-to source of production for companies over the past five years, according to a new report by the Korea International Trade Association.

Multinational firms are being increasingly pressured to move production away from mainland China to destinations such as Taiwan, Malaysia and Indonesia, the association said.

That includes some of South Korea's largest businesses, including Samsung, LG and Hyundai Motor, which have relocated factories from mainland China to Southeast Asian countries such as Vietnam and Indonesia in recent years.

The trend to relocate production began years ago and was further fuelled by desires to avoid tariffs stemming from a trade war between China and the U.S. Then came the pandemic.

Supply-chain disruptions for critically important goods such as computer chips have forced some economies to bring production home. This also helps them safeguard the supply of essential resources in the face of geopolitical tensions and uncertainties.

And governments have even begun to offer incentives for companies that reshore.

But when returning to their country of origin is not the best option, companies consider those that can offer the best operating environment and minimal supply-chain disruptions, including in the context of the U.S.-China rivalry.

Sometimes that means keeping certain operations in China, but moving others.

For instance, Samsung, LG and Hyundai still have factories operating in China: Samsung has a large chip plant in Xian and a factory producing household appliances in Suzhou; LG has plants producing display panels and batteries; and Hyundai Motor also has manufacturing plants.

But the intensifying competition between the world's two largest economies, especially in the Asia-Pacific region, has prompted the U.S. to create a regional economic alliance known as the Indo-Pacific Economic Framework?(IPEF).

This initiative is seen as a means to build supply chains ― with crucial items such as semiconductors and electric vehicle batteries ― that exclude China.

The U.S. has sought the membership of key developed economies in the region, and countries such as Japan, Australia and South Korea are expected to join.

South Korean President-elect Yoon Suk-yeol speaks on the phone with U.S. President Joe Biden at his home in southern Seoul, following his election on March 10. Provided by People Power Party

Korea is projected to boost its economic cooperation with the U.S. under a new conservative administration headed by Yoon Suk-yeol. This could recalibrate its trade strategy with China, which Korea depends on for resources such as semiconductors.

"It appears that it will be difficult for the global value-chain paradigm to return to the state before the era of competitive trade protectionism, and it can be projected that the world will set up stable value chains over efficient value chains," said the Korea International Trade Association report.

"Korean companies need to seek a strategic response, such as the relocation of production bases, given that the reorganization of global supply chains is not a temporary phenomenon but a shift that is taking place in the mid- to long-term, along with trade protectionism, the U.S.-China conflict, and the strengthening of supply chains of individual countries."

And this is all unfolding as China's zero-Covid policy continues to heap pressure on business operations in the country.

The?latest lockdown?of its largest city, Shanghai, which began in late March, has had businesses questioning the stability of China as a business environment.

Park Sang-min, vice-chairman of the Korea Chamber of Commerce in Shanghai, said that since large Korean businesses have production facilities outside Shanghai, they have been less affected. But small and medium-sized enterprises are struggling with "great difficulty".

"The companies that remain in China are those that need to utilize China's market," he said. "But measures such as sudden lockdowns worry the companies, because they create a destabilizing business environment. There could be firms that are considering relocating because of this factor."

Foreign firms are also concerned because there have been previous cases of reprisals from Beijing that had a damaging effect on businesses.

Park pointed to a series of measures that China took in 2017 after South Korea's decision to deploy the U.S. missile-defence system known as THAAD, and he said the response left Korean firms in China "in despair".

China has not acknowledged that the measures were a form of retaliation, but Korean firms said they still came as a devastating blow.

With Yoon set to be sworn in on May 10, uncertainty looms for the China operations of his nation's businesses under his administration.

"It seems that the prospects for Korean businesses in China are not bright, given the prolonged Covid-19 situation, global supply-chain issues, and the Russia-Ukraine situation," said an official with a Beijing-based business group, who spoke on condition of anonymity.

"But given that this year marks the 30th anniversary of the establishment of diplomatic relations with China, businesses want this to be a turning point."